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IN THE NEWS
28
T H E C A N A D I A N
HOME INSPECTOR
The logic is pretty simple. You hit rock bottom
and there is no where else to go but up.
Mortgage rates on terms of five years and
10 years have never been this low. You can go
back 50 years and not find a rate of 2.99% from
one of the major banks for a fixed-rate product
for five years. The 10-year, an almost unheard
of length for most Canadians to commit to, has
touched down at below 4%.
Even sticking it out with a variable-rate prod-
uct linked to the prime lending rate still looks
pretty good with most major financial institu-
tions offering some type of discount off their 3%
floating rate.
Already there are signs rates could be on the
increase. The bond market — which mortgage
rates are based on — has been rising fast
and the big banks say their most recent spe-
cials will come to an end this week. But even
with a 50 basis point increase, a five-year fixed
closed mortgage of 3.5% is almost unheard of
historically.
“Everybody is looking at the bottom here and
thinking, ‘When are rates going to go up?’” says
Kelvin Mangaroo, president of RateSupermar-
ket.ca which produces a monthly forecast from
leaders in the mortgage industry.
Even among the experts, few foresaw this price
war in the mortgage sector. “With the big banks
getting very aggressive again, it took a lot of
people by surprise,” said Mr. Mangaroo. “I think
people were thinking the status quo would hold
for a while.”
He says the last Bank of Canada announcement
about the economy had people thinking at some
point the overnight lending rate, which impacts
the prime lending rate, would go up, but not this
year.
“Now that people are thinking of early 2013,
that has people talking but really that is just so
far out says Mr. Mangaroo. “It’s really just an
abstract concept at this point.”
Craig Alexander, chief economist with Toronto-
Dominion Bank, says he can understand how
there might be some fatigue from consumers
hearing about rising rates.
“Unfortunately, we have been saying for years
‘that’s it, rates can’t go any lower than they
are today’ and then they are [lower] 12 months
later,” Mr. Alexander says.
But this time out, he says, it almost seems
impossible that rates on a five-year closed mort-
gage could go lower than the current 3%. “Short
of the Canadian economy going into a recession
and causing the Bank of Canada to cut rates
back to their all-time low, there really isn’t an
environment that would lead to significantly
lower mortgage rates,” Mr. Alexander says.
“The downside here is extraordinarily limited.”
The real risk for the consumer might be not
locking in right now. While no one is expect-
ing the overnight rate to go up anytime soon
— discounts off the prime lending rate might
even improve if the economic uncertainty calms
in some parts of the world — the 50-year-low
rates today could become hard to find.
“If the economic forecasters are wrong about
the outlook for growth and things turn out better
than anticipated, then bond yield will rise, we’ll
have a steeper yield curve and higher fixed mort-
gage rates,” Mr. Alexander says. “You won’t be
able to get what is offered today in 12 months
time. They could go up half a percentage point
or higher.”
In the interim, Gregory Klump, chief economist
with Canadian Real Estate Association, says in
terms of profitability, there is room for the banks
to go lower on rates, but margins for the banks
are so thin he doesn’t expect it happen.
“We are not out of the woods yet in terms of a
clear picture that growth is going to strengthen,”
says Mr. Klump about the catalyst that could
drive up bond rates, which would impact mort-
gage rates. “My own view is growth may well
weaken.”
He predicts that any rise in rates will happen
slowly, which the housing market would more
easily absorb. “I do not expect it,” Mr. Klump
says about the type of interest rate shock that
could send housing sales tumbling.
Author Garth Turner, a noted pessimist on the
fortunes of housing these days, thinks those
who want to be in the market for a house should
probably be grabbing on to long-term products.
He says the banks know the housing market is
already shrinking and are scrambling for a larger
share of the mortgage market, something that
also allows them to cross-sell other products
like RRSPs to consumers.
“The writing is already on the wall, prices will
be declining,” Mr. Turner says. “The Bank of
Canada will be raising rates.”
A Bank of Canada hike will make variable rates
rise fast, and he agrees the present day rates
could look very good in a few years. “If you want
to be a homeowner, it is an appealing product.
Three or fours years from now, these rates could
look absurd. I have no problem with being in real
estate as long as it’s not the bulk of your net
worth. If you are getting into real estate now
though and leveraging up, you are going to be
unhappy about it,” says Mr. Turner, adding the
raising rate environment will hurt sales and
prices will follow quickly.
Don Lawby, chief executive of Century 21, says
the rate wars going on right now combined with
the unusually warm winter have already boosted
housing sales, which could leave little demand
left for the spring market.
“Interest rates are low and they probably can’t
go any lower than they are,” says Mr. Lawby,
who thinks there is not much room for housing
prices to go higher. “I looked around and say if
the local economy stays good, the market can
stay good. But these low rates are very key.”
Mortgage Rates Have Nowhere to Go But Up
By Garry Marr |
Financial Post
| March 27, 2012